Cable’s Sexy Revenue Stream

6/13/2004 8:00 PM Eastern

By: R. THOMAS UMSTEAD

First it launched the home-video business. Then it built pay-per-view. Now adult content is on the cusp of jumpstarting video-on-demand.

As MSOs increase the pace of VOD technology rollouts, operators are quietly turning to adult programming to help generate lucrative and consistent incremental revenue while waiting for more traditional movie and television fare to catch fire with subscribers.

Adult content provides operators with alluring revenue split deals. It gives subscribers greater security, choice and variety — including more explicit adult content. And because of that powerful combination, industry observers believe that the PPV/VOD adult category serves as a formidable revenue rival to the home-video rental industry.

While operators rarely talk about the adult business, the national numbers tell volumes about the category’s revenue vitality. The adult PPV category has been a consistently strong revenue source for operators since the mid 1990s, posting impressive gains over the last five years as operators expanded adult offerings with the growth of digital cable. Adult revenue has nearly tripled from $263 million in 1998 to $609 million in 2002 — the most recent revenue figures — according to Showtime Event Television. Only the PPV/VOD movie category, which pulled $ 1.4 billion in 2002, generated more video transactional revenue for operators.

Unlike the PPV event and movie categories, where operators on average receive a 50% split of all revenues, adult PPV nets return 70%-90% of revenue to operators. Further, operators charge $3 to $5 more per adult PPV buy than the average $3.95 price of a PPV movie, further maximizing value of each adult transaction. With those financial advantages, it’s no wonder that some operators are reporting that adult content represents as much as 30% to 40% of their overall PPV/VOD revenue.

“There’s no doubt that the adult category generates a lot of money [for distributors],” says The Carmel Group chairman Jimmy Schaeffler. And it comes despite the myriad of adult programming that’s offered via print, the Internet and from hotel chains. Overall the adult business is estimated to generate $10 billion annually.

“[Adult content] seems very prevalent and available in a number of different areas, but it is very consistent for us,” says DirecTV senior vice president of programming acquisitions Michael Thornton. “People just like it. It’s partly because of the ease with which you can order it and the anonymity with which they can order it.”

FEMALE FACTOR

And it’s not just men ordering the product. Playboy TV executives have always asserted that almost half of its viewing audience is female. Still, operators say that about 20% of subscribers account for 80% of all adult PPV/VOD buys.

The revenue story is even more impressive when you consider that few MSOs actively promote their adult offerings. Further, some operators didn’t even offer adult fare in the past. For years, Adelphia Cable Communications and several smaller MSOs refused to carry even the tamest of adult services for image reasons. Now, almost all MSOs offer not only “hard R-rated” programmers like Playboy TV but more liberally edited, hard-core services like Playboy’s Spice networks and channels from New Frontier Media’s The Erotic Networks (TEN). Bresnan Communications is one of the few MSOs that still shun adult content.

As more secure digital technology became the standard among cable systems, operators became less concerned about potential backlash from consumers who may accidentally stumble on a barely scrambled adult network signal.

“We’ve seen a lot of cable operators that were reticent to carry adult programming that not only decided to carry the adult programming but decided to carry the more explicit editing standard because of the more secure technology,” says TEN Networks president Ken Boenish. “It’s helped operators breathe more easily knowing that the signal is secure and fully encrypted.”

MOVING AWAY FROM PPV

The advent of VOD further enhances the consumer’s choice and ability to order what they want to see and when they want to see it. One top-five MSO executive says his company is offering more lucrative and signal-secure VOD adult programming and de-emphasizing its adult PPV offerings.

“The world is moving toward an on-demand environment, which gives parents the most control over what comes into the home,” says the executive.

TEN was one of the first companies to offer VOD services to consumers. As a result, nearly 90% of all cable-ready VOD systems carry TEN content — 80% of them exclusively — according to Boenish. On average, adult VOD performance is nearly double that of standalone PPV channels.

“We also saw almost no cannibalization of PPV when we added VOD,” says Boenish. “People have a very robust appetite for adult programming,” he adds. “If you offer more choice and more variety, they’ll buy more.”

Mark Graff, president of Trans Digital Media LLC, which this summer will offer a VOD service based on the popular Playgirl magazine, believes that the days of linear adult PPV services are limited as operators seek to offer consumers more choice without hogging up bandwidth.

“There’s no need for adult programming to be linear,” says Graff, who founded Spice Network in the mid-1990s. “If a consumer likes blonde women, and you have the ability to drill down to such specific choices, that is far more attractive to consumers.”

VOD and digital cable have also allowed operators to feel less inhibited about offering more explicit programming — and distributors have stepped up to the plate with an unprecedented amount of adult content. Over the past five years, adult networks have launched a myriad of services offering operators a variety of programming, technological formats and editing standards that could fit just about any community’s ethics.

Playboy TV, for example, features 10 PPV and VOD channels, including a Spanish-language service and high-definition programming, while TEN offers seven adult-targeted services. But both companies will have to compete against several upstart adult networks slated to launch this year.

The new entities — Hustler TV and female-targeted services Playgirl TV and Inpulse — promise operators 80% to 90% splits, VOD opportunities and the some of the most explicit programming offered on cable.

And the more explicit the content, the better it sells, according to industry executives. Boenish says TEN generally sees a 50% to 100% increase in buys from the traditional “cable” standard to the less-edited, XX standard, along with an additional $1 to $2 in retail price.

“We have a $4.1 billion [adult] sales-and-rental market out there when you talk about [explicit] video and DVDs,” Boenish says. “When you talk about the cable and DBS markets, its somewhere between $700 million and $900 million. The more content and more variety in editing standards that’s available, the more people will choose to purchase their programming from cable rather than running down to the bookstore.”

Indeed, Michael Klein, executive vice president of LFP Broadcasting, which recently launched the Hustler On Demand VOD service, says the industry has the opportunity to steal consumers away from the home video industry if they provide a wide variety of explicit programming that consumers can buy at home.

“It’s still something that people want to see. It’s a matter of convenience to have it come through PPV or VOD than to have to go to the store,” says Klein, whose network offers programming from the famed Hustler magazine library. “It’s all about confidentially: some people still feel uncomfortable going to the video store to pick up an adult title, whereas in the privacy of their own house they’re able to do that.”

POTENT FUTURE

Both operators and content providers believe that the adult category will continue to thrive. As known brands like Hustler and Playgirl enter the marketplace, there’s an opportunity to expand the already diverse adult PPV audience.

On the technology side, Boenish says TEN will look to provide consumers even more value through interactive services. Consumers purchasing one of the company’s services could conceivably buy additional clips for $1.99 over their VOD or PPV purchase. “We’re trying to find out how to make the technology work for us.”